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Title

EXPLANATORY MEMORANDUM TO AS STARMAN'S INTERIM REPORT OF THE GROUP FOR THE FIRST QUARTER OF 2008

Message

General                                                                         
Success of Starman continued in the first quarter of 2008. The company          
maintained its strong position in the spheres of cable-TV and the internet and  
further strengthened its position in the telephony market.  Starman is currently
offering the best bundled triple play service in the home user sector. The      
triple play service is now available to the majority of the company's customers.
Through its cable network, Starman is currently represented in most of Estonia's
major cities, predominantly in densely populated areas. In December 2006, the   
product portfolio of Starman was supplemented with a DTT (digital terrestrial   
television) service. ZUUMtv, which was positioned separately, is transmitted    
through air and Starman's cable network is not used for delivering this product.
ZUUMtv is expected to attract a considerable number of new customers in the near
future, especially in those regions of Estonia where Starman was not present    
thus far.                                                                       
A consortium of financial investors led by Bancroft Private Equity LLP acquired 
a majority holding in Starman at the end of 2007. At the moment, Baltic Moontech
Investments Holding AS representing the above financial investors holds a total 
of 8,505,727 shares in Starman, i.e. 65.16% of the company's share capital.     
Given the current structure of shareholders, delisting of the company from      
Tallinn Stock Exchange will probably be applied for in the near future.         
Starman Group's total revenue for the first quarter of 2008 amounted to 5.3     
million euros, representing a 22% increase compared to the same period a year   
ago. EBITDA for the first quarter of 2008 amounted to 1.8 million euros and net 
profit attributable to shareholders to 0.9 million euros - respectively a 10%   
and 8% increase compared to the first quarter of the previous year. The good    
performance is built on the company's successful long-term activities relating  
to traditional services, where the best-ever results were achieved both in terms
of volume and profitability. As expected, the starting ZUUMtv had a negative    
impact on Starman's profit figures. A drop of 0.5 million euros in EBITDA -     
Starman's main performance indicator - is directly attributable to ZUUMtv, plus 
certain indirect costs whose amount cannot be determined precisely as they were 
allocated to a number of different products. The negative impact of ZUUMtv on   
the financial results of the Group is anticipated to continue also in the near  
future. However, in the long run the new product is expected to strengthen the  
company's market position and profitability.                                    

Financial ratios                                                                
A selection of ratios for evaluating the economic activities in the first       
quarter of 2008:                                                                
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|                                |     2006     |     2007     |   2008 Q1     |
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| Sales increase                 |     25%      |     19%      |      22%      |
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| EBITDA margin                  |     40%      |     33%      |      34%      |
--------------------------------------------------------------------------------
| Gross margin                   |     21%      |     13%      |      15%      |
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| Net margin                     |     19%      |     13%      |     17%       |
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| Revenue/average assets         |     0.72     |     0.73     |     0.80      |
--------------------------------------------------------------------------------
|                                |              |              |               |
--------------------------------------------------------------------------------
| Equity ratio                   |     58%      |     57%      |      59%      |
--------------------------------------------------------------------------------
| Debt to equity                 |     0.56     |     0.57     |     0.52      |
--------------------------------------------------------------------------------
| Debt/EBITDA                    |     1.19     |     1.41     |     1.12      |
--------------------------------------------------------------------------------
| Investments/EBITDA             |     0.83     |     1.15     |     0.79      |
--------------------------------------------------------------------------------
|                                |              |              |               |
--------------------------------------------------------------------------------
| Current ratio                  |     1.09     |     0.91     |     1.02*     |
--------------------------------------------------------------------------------
| Invoice turnover rate (annual) |     20.0     |     21.5     |     25.4      |
--------------------------------------------------------------------------------

Definitions:                                                                    
Sales increase = increase compared to the same period last                      
year                                                                            
EBITDA = operating profit + depreciation and amortisation                       
EBITDA margin =                                                                 
EBITDA / total revenue                                                          
Gross margin = operating profit / total revenue                                 
Net                                                                             
margin = net profit attributable to shareholders / total revenue                
Revenue /                                                                       
average assets - for comparison purposes, the revenue for the first quarter of  
2008 has been multiplied by 4                                                   
Equity ratio = equity / total assets                                            
Debt =                                                                          
borrowings + long-term borrowings                                               
Debt to EBITDA - for comparison purposes,                                       
EBITDA for the first quarter of 2008 has been multiplied by 4                   
Current ratio =                                                                 
current assets / current liabilities                                            
Invoice turnover rate = revenue for the                                         
period / accounts receivable at the end of the period; for comparison purposes, 
revenue for the first quarter of 2008 has been multiplied by 4                  
* As to this ratio, it should be borne in mind that because of the special      
nature of the accounting principles applied in preparing this report, only loans
repayable within the current financial year are recognised as short-term        
borrowings under current liabilities (i.e. in the case of the first quarter,    
loan payments due within the following nine months) unlike the year-end figures 
where all loans repayable within the following year are recognised as short-term
borrowings. Consequently, the current ratio for the first quarter is somewhat   
overestimated vis-à-vis the year-end figures. Upon eliminating this difference  
from the figures of the first quarter of 2008, the current ratio amounts to     
0.91.                                                                           

Group structure                                                                 
Starman Group consists of AS Starman being the parent company and, starting from
October 2006, Eesti Digitaaltelevisiooni AS being a subsidiary company. 66% of  
shares in Eesti Digitaaltelevisiooni AS are held by Starman and 34% of the      
shares by AS Levira. The financial results of Eesti Digitaaltelevisiooni AS have
been consolidated into the Group report on a line-by-line basis, separately     
indicating the minority share.                                                  

Revenue and expenses                                                            
As usual, cable television and internet services contributed the majority of    
Starman's total revenue for the first quarter of 2008, accounting for 45% and   
30% of total revenue, respectively. The share of telephony service was 17% and  
that of the DTT service, growing much faster than the others services, was 5%.  
Revenue from cable television services increased 18% compared to the first      
quarter of 2007. Organic growth in the market has mostly been achieved at the   
expense of price increase in recent years. In the first quarter of 2008 the     
prices of Starman's cable television services further approached those of       
countries with a similar living standard. In addition to the regular price      
increase, the ARPU (average revenue per user) is also supported by structural   
changes. As regards structural changes, the triple packages that do not contain 
smaller programme ranges and the new possibilities such as digital television   
should be mentioned. At the end of March 2008, the company had a total of 133   
thousand cable television customers, 6.1% of which were digital television      
users. The number of cable television customers at the end of the quarter       
exceeded the last year's relevant figure by 1.1%, quite a good result given the 
saturated market and tightened competition. In the first quarter of 2008 Starman
launched its own television channel called Neljas. Only Starman's customers can 
view the channel whose aim is to enhance the range of products offered to       
customers.                                                                      
Revenue from internet services was up 13% on the first quarter of 2007. At the  
end of March 2008, the company had 49 thousand internet customers, representing 
a 21% growth year on year. Starman maintained its position as the market leader 
of broadband internet for private customers in its footprint. In line with the  
general impacts of the market, the ARPU continued to show a downward trend.     
However, lately there has been a certain deceleration of the decline rate - the 
average figure of the first quarter of 2008 dropped 5% compared to the same     
figure a year ago.  Starman's popular triple packages in which the internet     
services are cheaper have a major impact on the internet ARPU. However, the     
supporting influence of the triple packages on other services and, hence, also  
on the average aggregate revenue per user cannot be disregarded.                
As expected, the period of accelerated growth of the telephony service has      
ended; however, the revenue for the first quarter of 2008 has still increased   
20% in comparison with the same period a year ago.  As at the end of March 2008 
the company had 45 thousand telephony clients, i.e. 36% more than at the same   
time last year. The ARPU of the telephony service, which has been quite stable  
in first years, has been declining significantly from the beginning of 2007. A  
similar trend continued in the first quarter of 2008 - the quarter's average    
figure decreased 11% compared to the last year's relevant figure.               
Starman views its cable television, internet and telephony services as a single 
integrated service. Since the provision of the integrated service has remained a
part of the corporate strategy for a long period of time, and the services are  
designed to support each other, a separate analysis of the respective segments  
might not give the most accurate picture. In the first quarter of 2008, the     
average aggregate revenue from the given services per customer was 12% higher in
comparison with the same period a year ago.                                     
Important positive developments regarding ZUUMtv occurred at the beginning of   
2008.  By now, eight Estonian-language TV channels, including the three main    
local channels, are available on the digital platform. The fact that not all of 
the main local channels were available on the digital platform affected the     
whole of the first year of operation of ZUUMtv, constituting a major divergence 
from the initial business plan.  Given also the possible positive developments  
relating to the fact that the switchover to digital broadcasting will take place
earlier, not in 2012 as first planned, Eesti Digitaaltelevisiooni AS has much   
better chances of making up for the initial setback.  Revenue from the DTT      
service was up 8.9 times on the first quarter of 2007; compared to the fourth   
quarter of 2007, the growth was 64%. In March 2008 the DTT service already      
constituted 6.1% of the company's total revenue, and this share is expected to  
increase significantly in the near future.  At the end of March 2008, Eesti     
Digitaaltelevisiooni AS had 12.5 thousand customers and ZUUMtv covered 97% of   
Estonian households.                                                            
Starman's operating expenses amounted to 3.5 million euros in the first quarter 
of 2008, having grown 30% compared to the same period in 2007. The fact that the
operating expenses grew faster than the revenue is primarily attributable to    
ZUUMtv - when eliminating the direct costs relating to this newly launched      
product, the increase in operating expenses would amount to 15%. The impact of  
ZUUMtv is most notable among expenses reported under “Services purchased” which 
include the transmission charge payable to Levira as a major expense item. The  
amount of the transmission charge depends primarily on coverage, and therefore  
its impact on profit figures after the product has just been introduced and     
customer figures are far from the company's long-term targets is quite          
substantial. In relation to the launch of Starman's own TV channel, the growth  
in programme costs has been much greater than the growth in revenue. Of major   
expense items, transportation expenses (increases in the price of fuel and      
insurance, and new vehicles added to the fleet), internet traffic expenses (a   
steady growth in the volumes of data used by customers), personnel and office   
expenses (a need for more office space due to an increase in the number of      
employees) have also shown fast growth compared to the same period a year ago.  
However, in respect of certain expense items growth figures have been quite     
modest and in some cases even negative.  While the reduction in marketing       
expenses in comparison with the first quarter of 2007 can be regarded as        
somewhat accidental, as to the rental of communication ducts, for instance, a   
considerable reduction in the charges payable to Elion Ettevõtted AS compared to
2007 can be expected (for further information, see Note 14).                    
In the first quarter of 2008, personnel expenses rose 29% year on year. As      
regards personnel expenses, it should be noted that this indicator includes 81% 
of the total wage fund, since the remainder is capitalised in accordance with   
the corporate accounting rules. The average number of employees was 258 in the  
first quarter of 2008 (222 in the first quarter of 2007). As at 31 March 2008,  
the company employed 261 people. Part-time employees accounted for 18% of the   
staff. The average number of employees translated to the full employment        
equivalent was 227 in the first quarter of 2008, up 15% compared to the same    
figure a year ago. The latter figure has not changed notably in comparison with 
December 2007.                                                                  
As to expenses related to asset valuation, the provision for bad debts amounted 
to 29 thousand euros, i.e. just 0.6% of the turnover for the period (0.8% in the
first quarter of 2007). Losses and discounts of inventories totalled 23 thousand
euros in the first quarter of 2008 (18 thousand euros in the first quarter of   
2007).                                                                          
EBITDA for the first quarter of 2008 amounted to 1.8 million euros. When        
eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to an
excellent 46%. Hence, the first quarter of 2008 was record-breaking in terms of 
profitability of traditional services. Besides the fact that today's main       
services have moved to a mature phase, seasonal factors also contributed to the 
excellent results, for it is usual that the first quarter is good in terms of   
profitability.                                                                  
Depreciation costs increased 20% compared to the first quarter of 2007. Owing to
the extensive investing activities carried out in recent years, the depreciation
costs continued to have a considerable impact on the profit figures. However, a 
deceleration of the growth of depreciation costs can be noted for the first time
in recent years. Considering the fact that traditional services have reached a  
mature stage, the continuation of this trend could only be hindered by an       
extremely successful growth in the sphere of the DTT service.                   
The net profit attributable to shareholders for the first quarter of 2008       
amounted to 0.9 million euros. The result for minority shareholders - their     
share in the loss of Eesti Digitaaltelevisiooni AS - was 0.22 million euros     
negative.                                                                       

Balance sheet, investments and financing                                        

In the first quarter of 2008, Starman's investments in fixed assets amounted to 
1.4 million euros, representing a 28% decrease compared to the same period a    
year ago. One quarter is too short a period to assess the volume of investments,
and the reduction in investments should be regarded as accidental.  The company 
made the following investments: 0.8 million euros in cable network renovation   
and construction, 0.3 million euros in STBs (incl. 0.3 million euros for        
provision of ZUUMtv), 0.1 million euros in telephone modems, 0.1 million euros  
in internet equipment (incl. 0.1 million in Head-Ends), and 0.1 million euros in
other spheres.                                                                  
Just as in previous year, projects aiming at network expansion are notable among
investments in the cable network. There are still some locations in Estonia     
where cable network expansion should be feasible, given the company's current   
success in providing telecommunications services. While a few years ago work    
aimed at the modernisation and enhancement of the data communication capability 
of the existing network constituted a major part of network investments, the    
relative share of that particular type of network investments is diminishing,   
given the high level already achieved. As at 31 March 2008, Starman's network   
covered 268 thousand households with 254 thousand - i.e. 95% - of the households
being served by a network with the data communication facility (as at 31 March  
2007 the comparable figures were 253 thousand, 231 thousand and 91%,            
respectively). As regards Starman's major network investments in the first      
quarter of 2008, the continuation of network expansion projects in the Kalamaja 
region in Tallinn, in Haapsalu and Võru as well as projects aimed at enhancement
of the network's data communication capability in Kuressaare and Valga should be
mentioned; in addition, network modernisation was started in Paide.             
Investments in telephone modems and STBs are directly related to the growth in  
the number of customers. Investments in internet equipment primarily enhanced   
quality in the environment of ever growing data communication volumes.          
Starman's balance sheet structure continues to be characterised by high         
capitalisation, a relatively low debt level and a sufficient liquidity. As to   
financing, the company's own resources were used in the first quarter of 2008   
since external funding decreased to a certain extent (by 0.3 million euros). The
level of inventories decreased by 0.3 million euros in the first quarter of     
2008; however, the level was still rather high as at 31 March 2008, mainly owing
to the network expansion projects to be launched in the near future.  As at 31  
March 2008, the number of STBs designated for the ZUUMtv offer included in the  
balance sheet of Eesti Digitaaltelevisiooni AS was rather small due to the      
cyclical nature of their delivery schedule. Yet, considering the long delivery  
schedule of the STBs and the anticipated market capacities for the new product, 
the level of these inventories will probably be rather high in the future.      

Rändy Hütsi                                                                     
Member of the Management Board                                                  
+372 677 9977                                                                   

Additional information: AS Starman interim report for 2007